The UAE Factoring Law was issued on 29 August 2021, published on 9 September 2021 and came into effect on 7 December 2021. It builds on the UAE Movables Security Law and clarifies that future receivables can be sold before they come into existence. This clarification will significantly assist those participating in the UAE trade finance market, bringing ever-greater certainty to CFOs, corporate treasurers and trade financiers alike.

UAE federal law No.20 of 2016, in relation to the charging or pledging of movables as security for indebtedness (the Old UAE Movables Security Law), was a significant development in the UAE banking and finance legal landscape. It gave rise to a considerable change in the practice of taking security over the movable property in UAE banking and finance transactions (including trade receivables), and it expressly permitted the ability to take a security right over future specified movable property, as well as present specified movable property.

However, it also went further and allowed true sales of receivables to be registered on the UAE movables security register (the UAE Movables Security Register). Article 11 of the Old UAE Movables Security Law stated that such registrations produced the same effects in their effectiveness against third parties, the procedures for their enforcement and prioritisation in their recovery of rights from the returns on them from the proceeds of their enforcement as if the sale of receivables was a security right registered on the UAE Movables Security Register.

That being said, it implied that future receivables could be subject to a true sale without expressly clarifying this. UAE federal law No.16 of 2021 concerning factoring and the assignment of receivables (the UAE Factoring Law) clarifies this and sets out the requirements to do so under UAE law. Key features of the UAE Factoring Law and considerations arising include:

• Helpful confirmation that future receivables can be assigned or sold prior to them coming into existence and without further action upon them if adequately defined in the Receivables Assignment agreement (as well as associated notice of assignment, acknowledgements and registration in the UAE Movables Security Register).
• Parties to a receivables assignment agreement will want to consider registering their receivables assignment agreement in the UAE Movables Security Register to obtain priority over any subsequently registered receivables assignment agreement in respect of the same receivables. In particular, historic receivables assignment agreements can be prioritised based on their execution date if registered before 7 June 2022. Therefore, it is recommended that such agreements be registered where possible and practical.
• Suppose parties send a notice of assignment to a receivable’s debtor. In that case, that receivable’s debtor may only effect a good discharge of the receivable if it pays in accordance with the notice of assignment. This enhances the protection to assignees even if the receivable’s debtor does not acknowledge the notice of assignment (although that is, of course, useful evidence that the receivable’s debtor has received the notice of assignment) or refuses countersign.
• Confirmation that the assignee may want to continue to insist on the receivable’s debtor signing an acknowledgement of the notice of assignment to ensure that the receivable is free from set-off and other competing rights.
• Helpful confirmation that an assignment of receivables includes a transfer of any ancillary rights, although there may continue to be sound reasons for taking a catch-all assignment of contractual rights, where financiers are concerned with more than just the receipt of the receivable (and rights ancillary to that receivable) generated by the original contract.

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Source: JD Supra and Dentons

Author: Nathaniel Armstrong, Dima Khuffash and Stephen Knight